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the future of car insurance

peer-to-peer, microinsurance, and flexible coverage

Car insurance is an industry as yet untouched by the ‘disruptions’ of the past five years. In other industries, such as hotels (AirBnb), taxis (Uber), and payments (Venmo, Cash etc.) a combination of increased technology and millennials’ digital savvy have fundamentally changed the way the consumer interacts with companies.

Millennials spend $200 billion per annum on consumer products (including insurance) making them a huge group to capture for insurance companies.

Innovations that have emerged in car insurance have supplemented, not challenged, traditional insurance companies. Telematics is the best example of this. However, there are currently three big trends in the car insurance industry that look set to challenge the core of large insurers’ business models.

peer-to-peer (p2p) insurance

WHAT IS IT?

Peer-to-peer (P2P) insurance is a radically different form of car insurance, fundamentally changing the traditional model of how car insurance works. Peer-to-Peer insurance is being driven by several smaller tech companies who see the future as being one without large insurers, and instead, more of a cooperative arrangement.

P2P insurance works by creating ‘pools’ of people with similar risk levels. For example, if you are a 35-year-old driver who wants comprehensive insurance, you will be placed in a pool with drivers of a similar age who wish for the same coverage. The money that is paid in premiums is held for the year, and paid out for those who make a claim.

Any profit made (usually less an admin fee) is either returned to the customer or donated to a charity of the pool’s choosing.

what’s different about it?

For the consumer, the big difference for P2P insurance is that payouts are far easier. Because it functions as a cooperative, and because of the embrace of technology, P2P insurance prides itself of ease of payouts. Most of them function through an app, and many boast that claims are settled in hours, not weeks.

how does it challenge the traditional model?

The premise of many P2P lending companies is that the business model of insurance is flawed, in that insurance companies are in charge of deciding whether a claim should be paid out, as well as their profit being driven by how few claims they pay out.

In effect, there is a financial incentive for insurance companies not to pay out. As a result, they place bureaucratic hurdles in the way of payouts, harming the consumer. P2P companies don’t have the same incentives, so are more consumer-friendly.

advantages

cost

One of the big advantages of P2P insurance is that the costs are limited because of the smaller input required from the insurance company. As many of the processes are automated, as well as the refund given to consumers at the end of the year, the premium prices can be far lower. It remains to be seen how this will develop once companies are less reliant on VCs and investors.

ease

The P2P model is inherently easy to workout. Indeed, some companies are experimenting with ‘micropools’, whereby small communities of people can combine to insure themselves. Large families or offices can therefore offer insurance.

Again, because the model of the company has changed, it is also far easier for the consumer to work with the company, because the power dynamic has changed.

payout

P2P insurers are intent on making the process of claiming easier, including using photos uploaded to apps to make claims (an innovation that has bled into the world of regular insurance companies), but they can also make payouts to apps like Venmo, Square, and Cash, meaning that consumers receive their payout even faster.

The widespread use of technology not only dovetails with the demands from younger customers, but also helps to reduce the costs involved in printing and sending checks.

disadvantages

bureaucratic hurdles

Insurance is an extremely well-regulated industry and so the barriers to entry for insurance companies are extremely high. This means that P2P insurers can often find it difficult to fulfil all of the legal requirements demanded by the industry, particularly while remaining lean enough to offer lower costs to consumers.

limited rollout

Companies like Lemonade, Guevara, and Teambrella are all offering P2P insurance, although they are still relatively limited, operating in only a handful of U.S. States. P2P has not yet reached the critical mass whereby it will be able to function adequately (because there will be enough people in the pool).

VCs are investing large sums of money (Lemonade raised $13 million) because they hope the critical mass will arrive sooner rather than later.

microinsurance

WHAT IS IT?

Microinsurance is already a major trend in car insurance. Globally, the microinsurance market experienced a major breakthrough in the earlier part of the decade, going from 76 million clients in 2010 to 260 million in 2013. Lloyd’s the insurer calculates that the potential global market is 3 billion policies.

Microinsurance effectively means having very short-term insurance for a very specific activity. In the developing world it follows concepts like microfinance and offers insurance to those who can’t access traditional capital.

In the United States, it means being able to get insurance for a single car ride, or even for a single hour.

what’s different about it?

Microinsurance differs from traditional insurance in that it allows for a much more modular form of insurance. Whereas large insurance companies often off-the-peg insurance for most people, microinsurance can be tailored to very short-term needs and demands.

If you use a car only very infrequently, then you can get insurance for single journeys, rather than paying for insurance when your car is unused.

how does it challenge the traditional model?

The biggest challenge to the traditional insurance model is that it runs counter to the direction insurance companies prefer to move. Most offer significant discounts for bundling insurance, and encourage you to take out as extensive coverage as possible.

Microinsurance challenges this by questioning the necessity of this in favor of much more specific insurance.

A natural parallel is that of cable television versus on-demand streaming services. Cable providers offer bundles, and consumers tolerated services they didn’t like because they got ones they did.

On-demand streaming services challenged this, with companies like Netflix, Hulu, and Amazon Fire all seeing significant growth in the past decade. Microsinsurance providers are hoping to capitalize on the same processes.

advantages

tailored

90% of the world’s data has been generated in the past two years. This means that insurance companies can be increasingly savvy at tailoring products to individual users.

As mentioned above, it will be possible for consumers to get insurance for a one-hour trip, or for a single weekend, rather than needing buy a whole annual insurance premium. Essentially, microinsurers offer consumers only what they need, and nothing that they don’t.

can be automated

Because of the ever-growing use of smartphones and apps (and the savviness of consumers in using both), many of the processes in microinsurance can be automated. You log into an app, choose your insurance, pay with the card stored, and you are insured. This greatly reduces costs to the company, and therefore drives down premium prices.

disadvantages

more expensive pro rata

One of microinsurance’s great strengths is also its weakness. Because it is for such a short period of time, it is far more expensive on a prorated basis than is the case with a regular insurance premium.

If you find yourself needing microinsurance more than you thought, you can soon end up spending more than you would have if you’d just bought a regular premium.

data security

One of the biggest potential risks of microinsurance, and something that companies offering it will need to address, is the problem of data security. Where there is data, and automated processes, there is the capacity for identity theft.

Microinsurance provides a great deal of information on an individual precisely because it is so targeted and tailored. This is perhaps the biggest challenge for companies in this field.

flexible insurance coverage

what is it?

Flexible insurance coverage is not, in itself,
a new idea. However, the integration of technology has made it more feasible to create an incredibly tailored experience. Companies like Metromile are growing rapidly, offering per-mile insurance coverage for drivers (aimed mostly at young drivers in urban areas who drive infrequently).

what’s different about it?

Flexible insurance provides hyper-tailored coverage. For example, using telematics, it is possible for some flexible insurance providers to offer insurance that only operates when the car is driving (this functions similar to a per-mile insurance).

The act of switching on the ignition causes the car insurance to activate, and parking or stopping the car ends it. There are also more options when it comes to cars for vacation homes, or for people who spend only part of the time in one location.

how does it challenge the traditional model?

This challenges the traditional model by putting the consumer totally in charge of his or her usage of insurance. Previously, insurance companies would be able to offer a long-term contract to a customer based on a set of off-the-peg options.

The only customization that would take place would be the actuarial math involved in calculating the risk. Instead, the business model has been flipped, and the calculation of the policy is individualized, and the rates are fairly standard.

advantages

short-term

The most obvious advantage to flexible insurance is that it can offer very short-term options, such as for people renting cars, or using a car for only a short period of time. This makes it an attractive option in a lot of cases.

tailored

As with most of the trends in the insurance industry at present, there is a move to a greater tailoring. Flexible insurance policies by definition allow for this. With the integration of technology, flexibility can even be automated, making hypertailoring a possibility.

This is likely to be a particularly strong area of growth amongst urban millenials, who use cars extremely infrequently, and therefore don’t require a year-long all-encompassing insurance policy, favoring something more tailored.

disadvantages

not always necessary

One of the disadvantages of flexible insurance policies is that is has the capacity to provide existing products, simply repackaged for millennials. Things like travel insurance already offer short-term, flexible insurance. Many car insurance companies also have some form of short-term insurance deals available.

This means that flexible insurance companies may not necessarily be offering anything that’s new, nor anything that’s necessary. Even worse, some may offer products that are already covered. For example, if you borrow a car from a friend, you will already be covered under the car’s insurance policy. There’s no need for you to buy an additional product.

comparable products

The advantages of flexible car insurance are contingent upon its integration with technology. Without that, it is difficult to see how it represents a disruptive influence. There are already traditional insurance companies offering, for example, ‘7-day insurance’, which effectively constitutes a flexible insurance policy.

Companies like Metromile are offering per-mile insurance, although car-sharing services like Car2Go and ReachNow already build this into their services. There is, therefore, a danger that flexible insurance will become obsolete before it even truly takes hold. Its problem comes from the fact that it is not different enough from what is already on the market.

Each of these innovations is making radical strides to change the way that consumers shop for, and use insurance. Ultimately, they all boil down to increasing the sense of convenience for the consumer. Across industries, the growth of technology and the increasing disposable income of millennials has led to demand for more tailored, more unique, and more consumer-friendly services.

Apps like Uber and AirBnb show that consumers are happier without an interlocutor than with. This will have ramifications on the insurance industry. Increasingly, the question will become not why is the insurance industry changing, but why has it taken them so long to do so.